The Federal Open Market Committee voted unanimously Wednesday to keep its target fed funds rate at 0.0% to 0.25% and reiterated other steps to increase liquidity in the hope of increasing bank lending which has effectively stopped. The Committee reiterated “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
Traders were closely watching for any change in the “extended period” phrasing.
The Committee offered some positives in its assessment of the economy saying “household spending appears to expanding” instead of its earlier language that it was stabilizing. The Committee did acknowledge low levels of business investment.
The FOMC said it was looking to business to lead a broader recovery.
“Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales,”the FOMC said in the statement announcing its action.
The specific rate decision means the prime lending rate – the rate banks charge their best customers and the rate which is the basis for credit card and home equity lines of credit – will remain at 3.25%. As rates have fallen, personal interest paid by consumers has dropped to $209.3 billion in September from $238.2 billion one year earlier. In June 2008, the FOMC maintained the target fed funds rate at 2.00% and held that rate until October when it cut the rate in two steps to 1.00%. In December the FOMC cut the rate again to its current level. Interest payments as a share of disposable income has dropped to 1.9% from 2.2% a year ago.
The Committee remained cautious and said “economic activity is likely to remain weak for a time,” adding “the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."
The FOMC faced a somewhat improved economic landscape as it began its two-day meeting which created its own set of pressures as meeting participants had to walk a fine line to avoid appearing to endorse forecasts it will begin to raise rates as early as December and most certainly by January.
One pressure on the FOMC was to continue to downplay concerns about inflation. Working in the FOMC’s favor in skirting inflation is that the excess cash the Federal Reserve has pumped into the economy has not flowed into markets. According to the most recent data from the Federal Reserve (weekly statement on assets and liabilities of commercial banks) bank lending is down a net $495 billion since October (when the FOMC began lowering rates and Congress approved the TARP legislation).
The statement made no reference to the financial regulation overhaul proposed by the Obama Administration even though the Fed has been arguing loudly in congressional testimony against granting the Government Accounting Office authority to audit FOMC decision-making. The statement issued today made no reference to those plans.
The next FOMC meeting is scheduled for December 15-16. Minutes of the November meeting will be made public
Here’s how the FOMC statement today compares with the statement issued following the September 23-24 meeting at which the Committee voted unanimously to continue to buy Treasury and other debt instruments, extended the time period for the mortgage backed security purchases into 2010 and put an end date on the program to purchase Treasury securities. The FOMC in September also held the target Fed Funds rate at the 0.0%-0.25% range. [Commentary] on the FOMC’s statement Wednesday follows.
Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.
Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.
[The FOMC was more upbeat saying household spending “appears to be expanding” instead of “seems to be stabilizing” repeating the cautions it found in September.]
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.
[No change in this paragraph.]
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.
[The FOMC repeated its expectations for tame inflation.]
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
[The Committee increased the rationale for maintaining rates to include its inflation expectations and repeated the key phrase of keeping the fed funds rate low “for an extended period of time.”]
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.
[The Committee reduced slightly its planned purchase of agency (Fannie Mae and Freddie Mac) mortgage backed securities due to a slowdown in mortgage lending activity. It also dropped reference to a specific date for ending its purchase of Treasury securities since that date (October 2009) has passed.]
Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
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